For two hundred years, the equality of creditors norm—the idea that similarly situated creditors should be treated similarly—has been widely viewed as the most important principle in American bankruptcy law, rivaled only by our commitment to a fresh start for honest but unfortunate debtors. I argue in this Article that the accolades are misplaced. Although the equality norm once was a rough proxy for legitimate concerns, such as curbing self-dealing, it no longer plays this role. Nor does it serve any other beneficial purpose.
Part I of this Article traces the historical emergence and evolution of the equality norm, first in the federal bankruptcy laws that applied to individuals and small businesses, and then as it diffused (much later) into large scale corporate reorganization practice. Part II describes how easy it has become to circumvent the norm, focusing on five strategies for giving a favored group of creditors a higher payout than other unsecured creditors. Although these evasions could and in some cases should be halted (as shown in Part III), it turns out that equality of creditors is a distraction (Part IV). It contributes nothing to an assessment of the relevant doctrines, and in several contexts seems to have had a pernicious effect. Elsewhere in the law, equality language can provide valuable benefits, such as “telling us that different treatment of people does matter.” Because none of these benefits is present in bankruptcy (Part V), the equality principle should be discarded.
Skeel, David A. Jr., "The Empty Idea of “Equality of Creditors”" (2018). Faculty Scholarship at Penn Law. 1724.
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